1. Sidharath Kapur has a very good oped which raises important issues relating to solar power procurement in India. In a rapidly evolving market with sharply declining cost, the developers and buyers face significant risks. The early moving developers face the risk of being left with higher cost power sources which will struggle to find buyers. And buyers entering into long-term PPAs will be left with buyer's remorse of high cost power they would want to replace.
He proposes some alternatives,
One option could be the long term PPA is at a de-escalating tariff. The bidding can be at a base tariff x which de-escalates at say 3-5% a year. This would mean that the starting tariff as a headline number being bid may be higher but the levelised cost of tariff would be lower. While the starting tariff may be a bit higher it will improve long term sustainability of the PPA in a downward sloping cost of power. Indian lenders would also like it given they lend for 10-15 years. The PPA can also be structured in a way which permits part of the committed capacity to be installed and sold in the open market. A base committed volume on long term PPA provides comfort to lenders while the market saleability reduces mutual obligation to buy and sell on producer and off taker. This will also bring more power to exchanges and deepen the market. This option can be strengthened by a contract of difference with the off taker underwriting to meet shortfall in revenue coupled with clawback of excess revenue on market power sales. This would bring PPA tariff down in case market is offering higher and vice versa. A 70/30-PPA/Non PPA mix will only impact the off-taker by 9p/unit in case the market price varies by 30p up or down over a PPA tariff of say Rs 2.50.Another option would be to change the bidding criteria. Instead of bidding on lowest tariff the option can be to bid for the lowest project cost to be recovered at a target project IRR. Operating costs are very low at 5-10% of the overall cost. A cap can be imposed on operating cost recovery as part of bid criteria to avoid gaming. Upon meeting target project IRR, the obligation on off taker to purchase power drops off. The developer is freed from the obligation to supply power and can sell power to the market. An interesting twist would be to have a twin bid criterion with appropriate weightage spread between lowest project cost and a stipulated range of lower target project IRR. This will theoretically result in a lowest cost of power based on project cost and target project IRR which will drop off once the latter is met. This should occur much before a 25-year PPA period. While this would entail annual computation of the recovered IRR, this should be a fairly easy arithmetical calculation. Going ahead this will bring to the market projects with recovered capital and thus can supply power to the market at extremely low cost given that only operating costs are to be recovered.
This again highlights the impossibility of trying to write complete long-term contracts, especially in a rapidly evolving area like renewables generation. Some form of revisit of the contract, within pre-defined boundaries and terms should be part of all such contracts.
Couple of graphics from Max Roser on the decline in solar prices. This about the levellized cost of energy, which captures the cost of building and operating plants with fuel costs,
And this about trends in the cost of electricity from various sources over the 2010-19 period
2. John Mauldin points to the Washington Post graphic about how large businesses cornered a disproportionate share of the Paycheck Protection Program (PPP) loans in the US.
He points to the unique confluence of favourable factors facing large companies - they have inherent economies of scale advantage (amplified by network effects in case of digital markets), low-cost Fed financing, and weakened competition because so many smaller companies are struggling. This opens the window for 'monopoly rents'.
3. From The Economist on the spectacular drop in coal-based power generation,
In Britain the share of electricity generated by coal fell from 40% in 2013 to 2% in the first half of this year; the country now burns less coal than it did when the first coal-fired power station was built in 1882. In the EU coal-fired power generation nearly halved between 2012 and 2019.
And the impact of China,
Asia is currently home to nearly 80% of coal consumption. Most of that—52% of the global total—takes place in one country: China. India, Asia’s second-biggest market, consumes less than a quarter as much. The growth in China’s coal-fired generating capacity between 2000 and 2012 helped reshape the global economy and drive a 200% increase in Chinese GDP per person. It also nearly tripled the country’s carbon-dioxide emissions, making it the largest emitter in the world. Its effects on air quality hastened millions of deaths... Yet coal-plant construction shot up in 2019. And in the first five and a half months of 2020 provincial governments, keen to boost employment and economic growth, gave companies permission to add a further 17 GW of new coal capacity... Chinese-financed coal plants in other countries are on course to add 74 GW of coal capacity between 2000 and 2033, according to Kevin Gallagher and his colleagues at Boston University.
This about the country's cost curve for various energy sources
4. From Businessline on PSU dividends, value capture or asset stripping?
Over the years, PSUs have been among the Centre’s major benefactors, contributing a significant portion of non-tax revenue in the form of dividend payouts. Between FY15 and FY19, they collectively paid ₹2.04-lakh crore in the form of dividend and other investments. Of this, mega PSUs (Maharatnas and Navaratnas) alone contributed over ₹1.66-lakh crore, or 82 per cent of the total.
And from Business Standard,
Over the past five years, a sample of 55 listed PSUs in aggregate paid over 70 per cent of their profits as dividend. The pay-out ratio for PSUs was more than twice that of Nifty50 firms.
5. On intergenerational mobility in India from Mathieu Ferry,
6. Harish Damodaran points to Punjab farmers being stuck in a middle income trap.
The average monthly income of agricultural households, according to the NABARD’s All-India Rural Financial Survey in 2016-17, was the highest in Punjab. At Rs 23,133, it was more than 2.5 times the national average of Rs 8,931 and ahead of Haryana (Rs 18,496) and Kerala (16,927), with Uttar Pradesh (Rs 6,668) and Bihar (Rs 7,175) far behind.
6. Sunita Narain's article on how widespread adulteration by large companies of honey with imported (and FSSAI test beating) Chinese sugar syrups was detected.
7. Rana Kapoor should be the next in the Netflix series on Bad Boy Billionaires.
8. Disturbing story about Big Tech spending large money in lobbying European legislators, raising fears of Washingtonization of Brussels.
Meanwhile Rana Faroohar thinks that with the anti-trust action initiated against Facebook for buying WhatsApp and Instagram, the regulators in the US may have finally come to appreciate the dangers of network effects and resultant monopolies.
See also this by Jayati Ghosh.
9. On the Indian economy, Jahangir Aziz makes the point about demand destruction during Covid and the challenges it poses to recovery. This is an important point
If the level of GDP was 100 in 1Q, then it fell to 75 in 2Q and recovered to about 92 last quarter, it is still about 8 per cent lower than the level in 1Q20. In fact, we expect GDP growth in FY22 to recover to 12 per cent from -9 per cent in FY21, which implies that six quarters from now it will still be about 7 per cent below the pre-pandemic path, or roughly $300-billion-a-year of income losses across two years, compared to the pre-pandemic path. Imagine the havoc this can wreak to household and SME balance sheets, to income inequality, to poverty, and to women’s employment, since much of the economic shock has been borne by services, where female employment is much higher than in manufacturing.
Mahesh Vyas on the problems faced by women in the labour market
Although the labour force participation rate (LFPR) for women is very low, at less than 11 per cent compared to 71 per cent for men, they face a much higher unemployment rate of 17 per cent compared to 6 per cent for men. The much fewer women who seek work find it much harder to find work compared to men... Women accounted for 10.7 per cent of the workforce in 2019-20, but they suffered 13.9 per cent of the job losses in April 2020, the first month of the lockdown shock. By November 2020, men recovered most of their lost jobs, but women were less fortunate: 49 per cent of the job losses by November were of women. The recovery has benefited all, but it benefited women less than it did men.
He points to LFPR for urban women in 2019-20 being 9.7% as against 11.3% for rural women. A reason,
Given that men continue to be considered as the principal earning member of a household, women are unlikely to accept poor quality jobs. Household incomes have risen to a point where employment for women as a second earning member of a typical household is not as much of a necessity as it is a choice. Such a choice will be exercised only if the job on offer is of good quality without punishing working conditions or prohibitive transaction costs. But, good jobs are on the decline.
The Urban LFPR has fallen to 6.9% in November 2020. The article has some very interesting, and disturbing, trends on female LFPR.
10. A review of the new guidelines issued by Government of India on ride hailing services. State governments to make their respective regulations based on this.
11. AK Bhattacharya on India's problem of very high share of unrealised direct tax revenues,
The disputed amount under this head (direct tax raised but not realised) doubled to Rs 8 trillion at the end of March 2019, compared to Rs 4 trillion at the end of March 2014. In other words, the share of unrealised direct tax revenue in total direct taxes collected went up sharply from 64 per cent in 2013-14 to 71 per cent in 2018-19... These disputes have remained unresolved for a long period of time— from more than a year to about 10 years... The problem arose in the last five years of the Manmohan Singh government. The total amount of direct tax arrears because of disputes was just about Rs 54,000 crore in 2008-09, or 16 per cent of total direct tax collections that year. In the following five years, the arrears kept mounting and ended up at as high a level as 64 per cent of total direct tax collections of Rs 6.38 trillion in 2013-14.
12. The latest round of NFHS-5 survey results point to a stagnation and even decline in child nutrition levels measured in terms of proportion of underweight children and stunting. This is just one more signature of the increasingly evident problems with India's economic growth model. Unlike the East Asian economies, where growth was accompanied with dramatic improvements in human development indicators, India's does not seem to be doing so. The survey found that at least one aspect of child undernutrition - underweight, wasting, stunting - had gone up in 14 out of 17 states.
There are two particular disturbing features. One, it is not that the pace of improvement in human development indicators has decline, but they are reversing. Second, India's low baseline should have meant that these indicators should be improving at rapid pace.
The survey's funding of increase in overweight children points to the importance of making the distinction between hunger and nutrition. While the former may be getting addressed, it is the later that is the concern. It appears that family incomes are not keeping pace with being able to afford basic nutritional food items like pulses, eggs, vegetables, fruits, and meat. It all then boils down to incomes.
This is a vicious circle. The long-term consequences of these in terms of being able to support broad-based economic growth is deeply disturbing.
13. New SEBI regulations opens the door for the likes of fintech companies to become asset management companies (AMCs) and offer mutual funds. In this context, it's important to keep in mind that fintech companies' expertise is on the transactions side (accessing customers and managing transactions), which is only a small and secondary part of the AMC's core activity of investing and managing the funds raised from its investors. Fintechs have no expertise whatsoever on the latter.
14. DK Srivastava analyses the budget prospects for the coming years and argues for favouring capital expenditure. His assessment of the gross tax revenues of the centre for 2020-21 to be Rs 17.2 trillion, exactly the same as that in 2016-17!
15. From a PRS report on state budgets,
During the period 2012-20, Centre’s cess and surcharge revenue nearly doubled from 0.9% of GDP to 1.7% of GDP. In comparison, GTR declined from 10.4% of GDP in 2012-13 to 9.9% of GDP in 2019-20.
16. Finally, an excellent graphical story highlighting how Delhi's air pollution differentially affects the rich and poor children.
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